Bank of Japan Raises Interest Rate to 1.25%, Highest in 31 Years

Japan’s central bank increased the country’s benchmark interest rate to 1.25% on Friday as the policymakers were keen on addressing the threat of inflation going beyond the central bank’s target rate of 2%. 

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With the increase, which was widely anticipated, the interest rate is now at 1.25% from 1%. This move came after the Bank of Japan’s two-day monetary policy meeting, which garnered a consensus of seven to two. 

Two board members Toichiro Asada and Ayano Sato opposed this increase. 

The yen was weak immediately after this news, dropping 0.5% to 156.75 from the US dollar. Despite this Friday's hike, the currency remains almost 2% higher for the month. 

The yen had declined to a 40-year low of 163.99 to the US dollar on July 23. However, coordinated intervention efforts by both the Japan and the US managed to take the currency away from these lows. 

Friday’s decision also takes Japan’s policy rate into the lower end of the BOJ’s estimated neutral-rate range for the first time. A neutral rate is generally understood as a level that neither stimulates nor restricts economic activity. 

The central bank has maintained that further increases remain possible if the economy and prices develop in line with its projections. 

The September decision also puts Japan alongside other major economies that have moved towards tighter monetary policy this month. 

The US Federal Reserve raised rates on Wednesday for the first time in three years. The European Central Bank also increased rates last week, while the Bank of England kept borrowing costs unchanged on Thursday but indicated that another increase could become necessary if inflation pressures intensify. 

Those decisions have come against a difficult backdrop for central banks. The Middle East conflict has lasted for more than six months, while oil prices remain above $100 a barrel, adding to concerns about inflation. 

Asian equity markets moved higher on Friday after the BOJ announcement, while the dollar held its ground. 

BOJ Governor Kazuo Ueda is due to address the decision at a news conference later on Friday.